Question

Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2010, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Morgan credit to the account "paid-in capital in excess of par," as a result of this conversion?

a. $330,000.
b. $160,000.
c. $1,440,000.
d. $720,000.

Answer 1

To determine the amount of 'paid-in capital in excess of par' that Morgan Corporation should credit as a result of the conversion, calculate the number of shares to be issued and the excess of the market price of the common stock over the conversion price.

Step-by-step explanation:

To determine the amount of 'paid-in capital in excess of par' that Morgan Corporation should credit as a result of the conversion, we need to calculate the number of shares that will be issued and the excess of the market price of the common stock over the conversion price. Here's how:

1. Calculate the number of shares to be issued by dividing the face value of the bonds converted by the conversion price: $2,400,000 / $1,000 = 2,400.
2. Calculate the excess of market price over the conversion price: ($35 - $20) = $15.
3. Multiply the excess by the number of shares: $15 * 2,400 = $36,000.

Therefore, Morgan Corporation should credit $36,000 to the account 'paid-in capital in excess of par' as a result of this conversion.